The following was abridged by Alistair McConnachie, from the works of Michael Rowbotham

The financial system currently adopted by all nations is often
described as “debt based”, since the process
of going into debt is relied upon almost exclusively to create
and supply money to their economies. By the action of
lending to borrowers, commercial banks create
credit and advance this to industry, consumers and governments.
This “bank credit” circulates in the broader economy until such
time as the loan is repaid. Such “bank credit” now forms 96% of
the money stock in most industrial nations, with a mere 4% the
notes and coins created by government, and free from a parallel
debt.

Thus, almost the entire money stock
is supported in circulation by vast debts in four
main sectors….

Private debts eg. mortgages, loans, overdrafts, credit-purchases

Industrial and commercial debts

Government “national” debts

International, including Third World debt

The supply of money is a direct product of borrowing, and debt
maintains this money in circulation. Modern debt is, in
aggregate, quite unrepayable. Furthermore,
difficulty is experienced in the repayment of individual debts
in all four sectors.

The Drive Behind Globalisation, 1998, pp 3-4.

Money is created in each of these four areas….

How BANKS CREATE MONEY for PRIVATE & COMMERCIAL Needs

If a bank makes a loan, nothing is lent, for the simple reason
that there is nothing of substance to lend. The bank makes what
it terms a loan against the amount of money deposited with it at
that time. This is all done with the utmost ease. The bank has
simply to agree that a person may take out a loan of, say,
£5,000. The person taking out the loan can then spend £5,000 and
hey presto! £5,000 of new number-money has been created. No one
with a bank account is sent a letter telling them that the money
in their account is temporarily unavailable, because it has been
lent to someone else. None of the original accounts in the bank
has been touched, reduced or affected. Nobody else’s spending
power has been reduced, but £5,000 of new spending power has
been created; £5,000 of new number-money enters the economy at
the stroke of a bank managers pen, but £5,000 of debt has also
been created.

Thus, whoever takes out the loan will then make purchases and
payments to other people, who will pay that new money into their
bank accounts. Result: more bank deposits! As soon as the loan
in the example above is spent, £5,000 will find its way into the
bank account of a car dealer or DIY store; £5,000 of apparently
new money. This is money which has supposedly been loaned but
the banking system doesn’t distinguish this fact. It simply
registers a new deposit, and regards it as new money. Total
deposits in the banking system have therefore increased by
£5,000. This is the boomerang effect of a bank loan by which a
loan rapidly creates an equivalent amount of new bank deposits
in the banking system. This effect was neatly summarised in a
statement by Graham Towers, former Governor of the Central Bank
of Canada…. ” Each and every time a bank makes a loan, new bank
credit is created — new deposits — brand new money.”

The new money will provide the banking system with the
collateral for more lending. This is the bolstering effect of a
bank loan. As the total money held by banks and building
societies becomes swollen by loans returning as new deposits
this provides them with the basis for further loans.

Perhaps the best description of this process of money
creation was provided by H.D. Macleod : ”

When it is
said that a great London joint stock bank has perhaps
£50,000,000 of deposits, it is almost universally believed that
it has £50,000,000 of actual money to lend out as it is
erroneously called… It is a complete and utter delusion.
These deposits are not deposits in cash at all, they are nothing
but an enormous superstructure of credit.”The Grip of Death, Jon Carpenter Publishing, 1998, pp. 11-13.

How BANKS CREATE MONEY for NATIONAL Needs

A country’s national debt is completely separate from, and
additional to, the level of private and commercial debt directly
associated with the money supply. The United Kingdom
national debt in 1998 stands at approximately £380 billion. If
the private and commercial debt of £780 billion and the national
debt are added together, the total indebtedness associated with
the UK financial system stands at some £1160 billion, which
dwarfs the total money stock of £640 billion! How did this
condition of overall negative equity come about?
This excessive indebtedness — which is a blatant
misrepresentation of the real state of economic wealth enjoyed
by the nation — is a position shared by all the developed
nations.

The national debt is actually composed of thousands of pieces of
paper called stocks, bonds and treasury bills. These
stocks and bills, known as gilt-edged securities,
or gilts, are essentially elaborate forms of government IOU.
These IOUs are issued because each year the government
fails to collect enough in taxes to cover the costs of its
public services and other spending — and it borrows money
to cover this shortfall. All government budgets overshoot by
many billions of pounds, dollars or deutschmarks annually. This
leads to what is called the borrowing requirement
for that budget year. A country’s national debt is
therefore the total still outstanding on all past years’
borrowing requirements; thus the UK national debt
consists of £380 billion of these gilt edged IOUs, in the form
of outstanding treasury bills and stocks.

The method of issuing these IOUs and administering the national
debt is quite simple. In order to obtain money to cover its
annual spending shortfall, an appropriate number of government
stocks and bills are drawn up by the Treasury. These are then
sold in fact they are auctioned off in the money markets to the
highest bidder. This is done throughout the year to meet the
shortage of revenue as it arises, and the announcements, in the
form of government advertisements, can be seen regularly in the
financial press. These stocks and bills are bought because they
promise to repay a larger sum of money at some future date, and
are sold at a price that promises a good return to whoever buys
them. They are usually denominated in considerable sums of
£1,000 or more per bond and are bought by insurance
companies, pension funds, banks and trust funds… anywhere that
money accumulates as savings. By selling these stocks,
the government obtains the additional money it needs for the
public sector, making up the annual shortfall in what it can
gather by taxation.

As these government stocks mature and become due for payment,
the government has to find the money promised on those stocks,
and pay it to the financial institutions that bought them. But
governments are unable to pay this money owing on their past
stock issues. Indeed, each government is confronted by thecurrent year’s annual shortfall in taxation
receipts. The whole reason for the government issuing
stock in the first place was because it could not cover its
expenditure through taxation, and this annual shortfall
is constant. There is no way a government can pay the money it
owes. How then can the government pay up on its maturing stock?
It has underwritten promises it cannot keep. What happens is
that the government obtains the money to meet the payments due
on maturing national debt stocks by selling more
government stock to the financial institutions —
promising even more money in the future. The government draws up
enough new stock to cover the repayments due on the old stock,
sells this, and uses the money to pay off the old stock. Of
course, when this new stock matures it too has to be paid off
from the sale of yet more stock. The government manages to pay
off the national debt, and not pay it, at one and the same time…

There is a pretence that this is not the true arrangement, since
repayment of national debt stocks is actually accounted as
coming from taxation, not from the sale of more bonds. But this
repayment from taxation creates such a massive shortage in
government revenues that can only be made up by the sale of more
bonds so the net effect is that repayment is constantly deferred
by the sale of further government bonds. This is what is
referred to as interest on the national debt although it is not
really interest in the conventional banking sense, but a
constant rescheduling of a completely un-repayable debt.
This deferral is not, however, the end of the story….

At the same time as deferring and re-mortgaging theexisting level of national debt, the government
has to sell yet more stock to cover the amount
by which taxation falls below what is needed to support its
public services. The national debt therefore escalates,
increasing by the amount required to re-mortgage the past
national debt, plus the shortfall in revenues to fund the public
sector. In 1960, the UK national debt was £26 billion; by
1980 it had risen to £90 billion. The national debt in 1998
stands at nearly £380 billion, and is likely to reach a trillion
pounds within the next 20-25 years. In America, the national
debt in 1960 stood at $240 billion; by 1997 it had reached the
level of $5,000 billion, or $5 trillion!

It should also be remembered that the money held by pension
funds and insurance companies, or whoever buys the government
stocks, is money that had to be borrowed into existence
in the first place. In other words, by this process,
governments borrow money which has already been borrowed into
existence, and they thus create a second massive institutional
debt in respect of money which already has a debt behind it!
Adding the national debt to the total of private debt places a
country and its people in a position of overall negative equity,
owing far more on paper than the amount of money that exists in
the economy.

The Grip of Death, pp. 96-98.

So, in summary: Governments draw up official treasury bonds, and
these are auctioned on the money markets. The bonds are bought
by both the banking and non-banking sectors. When the
non-banking sector (pension and insurance funds etc) purchases
the bonds, saved monies are recycled into the economy through
government spending. When the banking sector buys government
bonds, banks and lending institutions create credit: There is an
increase in the money stock. This money is spent into the
economy through government spending.

Creative Accountancy, 1998, p. 29.

How COINS and NOTES are CREATED

The significant point about coins and notes money created by the
government is that this money is created debt-free,
and spent into the economy by the government. This
is a vital consideration, and it is therefore important to
appreciate precisely how this injection of debt-free
money is managed. Coins and notes are minted and printed
by the government at no cost, apart from that of materials. Of
course, governments have no particular need of these coins and
notes; banks are the institutions requiring a supply of cash.
The government therefore sells the coins and notes that it
creates to banks, who pay by cheque, and the government acquires
the face value of those coins and notes in number-money. The sum
of money which the government obtains, and which is debt-free so
far as the government is concerned, is then added to whatever
taxation revenue has been raised to fund the public sector.
Thus, coins and notes are created by the government, and an
amount equivalent to the face value of those coins and notes is
spent into the economy as a direct, debt-free
input.

The Grip of Death, p. 14.

How INTERNATIONAL or Third-World DEBT is CREATED

The financial position of even the wealthiest nations is one of
acute financial pressure, with massive private and
national debt, and budgetary difficulty dominating the
economy. How can the wealthy nations, from a position of such
perpetual monetary shortage and insolvency, lend money to the
developing nations? The answer is that they do not. The
money advanced to Third World nations is not money loaned from
the wealthy nations. These sums consist almost entirely of
monies that have been created, via the commercial banking
mechanism, specifically for the purpose of the loan
concerned. In other words, the same debt-based, banking
process used to supply money to national economies is also
employed for the creation and supply of funds to debtor nations.Thus, these monies are not owed by debtor countries to the
developed nations, but to private, commercial banks.

The WORLD BANK

Holding only a nominal reserve contributed by the wealthy
members, the World Bank raises large quantities of money by
drawing up bonds and selling these to commercial banks on the
money markets of the world. Thus, the World Bank does not
itself create the money it advances to Third World nations, but
sells bonds to commercial banks which, in purchasing these
bonds, create money for the purpose. The World Bank
therefore functions along the lines of a country’s national debt.
Just as with the government bonds of a country’s national debt,
when a commercial bank makes a purchase of World Bank
money-bonds, the commercial bank creates additional bank credit.
In essence, the World Bank acts as broker for commercial
banks, who are the actual money-creation agents and who hold
World Bank bonds in lieu of monies they create in
parallel with debts registered against Third World nations.
Although these loans may be denominated in pounds, dollars or
Francs, such loans advanced under the World Bank have no
connection with respective national economies, and in no sense
represent monies loaned by these nations, nor debts owed to them
by developing nations. The debts are owed to private,
commercial banks (via the World Bank) in respect of money they
have created through the purchase of debt bonds.

The INTERNATIONAL MONETARY FUND

The IMF presents itself as a financial pool an international
reserve of money, built up with contributions, known as quotas,
from subscribing nations — that is, most nations of the world.
However, credit creation accompanies almost every aspect of IMF
funding….

Twenty-five percent of each nation’s IMF quota is paid in the
form of gold, the remainder in the nations own currency. The 25%
gold quota is the only component of IMF lending capacity that
does not, in some way, constitute additional money created in
parallel with debt.

The 75% of a nation’s quota payable in national currency is
invariably funded by the government concerned through the sale
of bonds, thus adding to that nation’s national debt. Therefore
the IMF, whilst not itself creating credit, places
monetary demands on member countries for quotas that can only be
funded via each country’s national deficit. This involves
the sale of government bonds to commercial banks, leading to
money creation by those banks. This source of revenue forms the
main fund of IMF monies available to developing nations.

Since the monetary demands on the IMF are constantly increasing,
due to rising demand for Third World loans, the quota demands by
the IMF have reached the point where (so-called) creditor
nations such as America and Britain are reluctant to undertake
yet more bond issues and further national debt to supply these
funds.

So, in recent years the IMF has begun to
circumvent the restrictions of its overall quota. By
co-operating directly with commercial banks to organise more
substantial loans than it can fund from its own quota
resources, the IMF administers loan packages made up in part
from its own quotas and in part from commercial sources.
For example, of the $56 billion loan advanced under the IMF to
South Korea in the wake of the Asian crisis, only $20 billion
was contributed by the Fund; the remaining $36 billion was
arranged by direct co-operation with international commercial
banks, which created money for the purpose.

The total funds of the IMF were substantially increased and its
function and status as a money-creation agency clarified when,
in 1979, the IMF instituted Special Drawing Rights (SDRs). These
SDRs were created, and intended to serve, as an additional
international currency. Although these SDRs are credited to each
nations account with the IMF, if a nation borrows these SDRs
(defined in dollars) it must repay this amount, or pay interest
on the loan. Whilst SDRs are described as amounts credited to a
nation, no money or credit of any kind is put into nations
accounts. SDRs are actually a credit-facility just like a bank
overdraft if they are borrowed, they must be repaid. Thus,
the IMF is now creating and issuing money in the form of a
new international currency, created in parallel with debt, under
a system essentially the same as that of a bank… the IMF
reserve being the original pool of quota funds.

In summary, of the $2,200 billion currently outstanding as Third
World or developing country debt, the vast majority represents
money created by commercial banks in parallel with debt. In no
sense do the loans advanced by the World Bank and IMF constitute
monies owed to the creditor nations of the World Bank and
IMF. The World Bank co-operates directly with commercial
banks in the creation and supply of money in parallel with debt.
The IMF also negotiates directly with commercial banks to
arrange combined IMF/commercial loan packages.

As for those sums loaned by the IMF from the total quotas
supplied by member nations, these sums also do not constitute
monies owed to ‘creditor’ nations. The monies subscribed as
quotas were initially created by commercial banks through the
agency of national debts. Therefore both the contributing nationand the borrowing Third World nation carry a
burden of debt associated with these sums. Both quotas and loans
are owed, ultimately, to commercial banks.